Making 'benefit corporations' more than just academic

Making 'benefit corporations' more than just academic

In a classroom at San Francisco State University’s downtown campus, about 40 academics joined a like number of social entrepreneurs to discuss how to bring academic rigor to an emerging business concept.

It was, said Dermont Hikisch of B Lab, a nonprofit group that has developed an assessment to certify socially responsible businesses as "B Corps,” "the first engagement between the academic community and benefit corporations at such a large scale.”

These social entrepreneurs were searching for scholastic bedfellows to join them as architects in their grand experiment.

Benefit corporations are a new type of corporation, which possess legal recognition under corporate law in some states to consider stakeholders, not just stockholders, in making decisions. B Corps, on the other hand, are businesses certified to be socially responsible through B Lab. They do not have a distinct legal status.

Steve Piersanti, president and publisher of Berrett-Koehler Publishers, a certified B Corp, and a speaker on the morning panel, described his dilemma in the form of a challenge to the academics. “We need a parallel profession of auditors of companies' social responsibility, environmental responsibility, and organizational practices. And we need theories, research, standards, and infrastructure to support this endeavor. If it’s going to happen, then this group is going to be part of it,” he said.

Later in the day, Kirsten Tobey, co-founder and chief information officer of Revolution Foods, echoed Piersanti’s sentiment. Her seven-year-old company has provided more than 40 million meals to children in partnership with schools across the United States.

Tobey, like many B Corp executives, is on the front lines, navigating a dynamically evolving field with millions in high-stakes investments. She said her company needs “academic rigor behind us to demonstrate to investors who don’t get it yet that there is a real benefit as an investor, not just as a stakeholder.”

Seven States and Counting

While the concept of benefit corporations has historic roots in the charters of early America, the construct has picked up steam since 2010, when Maryland became the first state to legally recognize this new class of corporation.

This January, California became the sixth state to recognize this new legal entity, with the signing of AB 361. Soon after, New York became the seventh and legislation is in the works in four more states. But Delaware, where more than half of publically-traded US companies are incorporated, is not yet among them.

Revolution Foods is a B Corp headquartered in Oakland, Calif. But because it is incorporated in Delaware, it is not a legally designated benefit corporation.

In theory, with enough executive and shareholder support, any corporation or business entity can become a B Corp through certification through B Lab. But the reality of legally acting in the interests of stakeholders versus shareholders is more problematic, according to John Montgomery, partner and co-founder of Montgomery & Hansen, and co-chair of the legal working group behind the California law. “Many corporate codes do not expressly allow the board of directors to consider the interests of the corporation’s other stakeholders, including society and the environment,” he said.

The risks can be seen in Ben & Jerry’s, the socially minded ice cream maker, which in 2000 was sold to the multinational Unilever. There had been another offer tendered by a firm with more closely aligned values, but it was turned down by Ben & Jerry’s board because of a slightly lower share price. The risk was that shareholders might sue Ben & Jerry’s for denying investors additional profits.

Benefit corporations fundamentally solve this dilemma. They widen the corporation’s responsibilities beyond the board’s traditional fiduciary duties to shareholders, requiring the company to also consider its material positive benefit to society and the environment. This new construct provides a legally binding definition to a shareholder’s right to triple-bottom-line value.

Mike Hannigan, the pioneering cofounder and president of the office products distributor Give Something Back, said it best. “Companies are always looking to increase the value to their stakeholders. We just have a different set of stakeholders, and so we have a different set of answers.”

“The Myth of Shareholder Value”

There is nothing in corporate law that states that companies exist solely to maximize profit for shareholders, several panelists and audience members pointed out over the course of the day. But despite being a profound legal truth, it is mostly a technicality. “Whether or not it's in the law, there are 500 years of momentum behind the thinking that corporations are solely about maximizing profit for shareholders,” explained Montgomery.

Profit maximization may not be part of the fiduciary responsibilities as defined in the law, but it is so essential to the vernacular used to interpret it that critics referred to it as “the myth of shareholder value.”

“I truly believe we’re in the very front end of a global paradigm shift to having corporations that exist to optimize good and profit,” said Montgomery. “We’re pack animals, hardwired to form tribes and groups. But we don’t have a framework for supporting the collective conscience and consciousness of the people within our corporations.” He views the benefit corporation as architecture to enable cooperative social benefit through enterprise.

At the end of the day, the social entrepreneurs found academic collaborators for research, case studies, additional workshops, and conferences, with more conversations continuing. Connections like these are a first step.